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FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A two-year bond with face value 100 pays an annual coupon of 5%. The yield to maturity is 4.00% per year with annual compounding. What is the bond's price?

The price is 101.89. Discount the first coupon of 5 by one year at 4% and the final 105 by two years at 4%, giving 4.81 plus 97.08. The bond trades at a premium because its 5% coupon exceeds the 4% yield.

  1. A100.00
  2. B98.17
  3. C101.89Correct
  4. D110.00

Explanation

Price = 5/1.04 + 105/1.04^2 = 4.8077 + 97.0784 = 101.89. A coupon above the yield means a premium price. 98.17 results from wrongly using a 6% yield, and 110 is the undiscounted cash flow total.

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